SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) MARCH 13, 1997
FIRST AMERICAN RAILWAYS, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 33-14751-D 87-0443800
- -------------- ---------------- --------------
(STATE OF (COMMISSION FILE (IRS EMPLOYER
INCORPORATION) NUMBER) IDENTIFICATION
NUMBER)
3700 NORTH 29TH AVENUE, SUITE 202, HOLLYWOOD, FLORIDA 33020
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES OF THE REGISTRANT)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 920-0606
NOT APPLICABLE
- --------------------------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The following financial statements of The Durango & Silverton
Narrow Gauge Railroad Company ("D&SNG") are included herein:
(i) Report of independent certified public accountants;
(ii) Balance sheet as of December 31, 1996;
(iii) Statements of income for the years ended December 31, 1996
and 1995;
(iv) Statements of stockholders' equity for the years ended
December 31, 1996 and 1995;
(v) Statements of cash flows for the years ended December 31,
1996 and 1995;
(vi) Summary of accounting policies;
(vii) Notes to financial statements.
2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder
The Durango & Silverton Narrow Gauge Railroad Company
Howey-in-the-Hills, Florida
We have audited the accompanying balance sheet of The Durango & Silverton Narrow
Gauge Railroad Company as of December 31, 1996 and the related statements of
income, stockholder's equity and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Durango & Silverton Narrow
Gauge Railroad Company as of December 31, 1996 and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Orlando, Florida
April 8, 1997
3
<PAGE>
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
BALANCE SHEET
DECEMBER 31, 1996
- ------------ ---------------
ASSETS (Note 4)
CURRENT:
Cash and cash equivalents $ 32,507
Trade accounts receivable 5,332
Inventories (Note 2) 739,530
Prepaid expenses 79,702
--------------
TOTAL CURRENT ASSETS 857,071
--------------
PROPERTY AND EQUIPMENT, net (Note 3) 6,519,201
OTHER ASSETS:
Deferred loan costs, net of accumulated
amortization of $125,394 252,734
Accounts receivable from stockholder (Note 8) 8,689,745
--------------
TOTAL OTHER ASSETS 8,942,479
--------------
$ 16,318,751
==============
4
<PAGE>
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
BALANCE SHEET
DECEMBER 31, 1996
- ------------ ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 384,225
Accrued expenses 501,511
Retirement contribution refund payable to employees (Note 1) 338,000
Current maturities of long-term debt (Note 4) 578,076
-----------
TOTAL CURRENT LIABILITIES 1,801,812
LONG-TERM DEBT, less current maturities (Note 4) 3,792,295
ACCRUED PENSION PLAN LIABILITY (Note 5) 66,281
-----------
TOTAL LIABILITIES 5,660,388
-----------
COMMITMENTS AND CONTINGENCIES (Note 6) --
STOCKHOLDER'S EQUITY (Note 9):
Common stock, no par, 500,000 shares authorized,
100,000 shares issued and outstanding 2,750,000
Additional paid-in capital 4,694,837
Retained earnings 3,213,526
-----------
TOTAL STOCKHOLDER'S EQUITY 10,658,363
-----------
$16,318,751
===========
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL
STATEMENTS.
5
<PAGE>
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1996 1995
----------- -----------
REVENUES $ 8,946,462 $ 8,468,463
COST OF REVENUES 5,143,802 4,828,207
----------- -----------
Gross profit 3,802,660 3,640,256
OPERATING EXPENSES (Notes 5 and 8) 2,047,366 2,058,068
----------- -----------
Operating income 1,755,294 1,582,188
----------- -----------
OTHER INCOME (EXPENSE):
Interest income (Note 8) 528,487 373,455
Interest expense (580,725) (579,685)
Litigation settlement (Note 6) -- (154,114)
----------- -----------
(52,238) (360,344)
----------- -----------
NET INCOME $ 1,703,056 $ 1,221,844
=========== ============
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL
STATEMENTS.
6
<PAGE>
<TABLE>
<CAPTION>
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
COMMON STOCK ADDITIONAL
STATED PAID-IN RETAINED
SHARES VALUE CAPITAL EARNINGS
------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 100,000 $ 2,750,000 $ 4,694,837 $ 1,551,185
Dividends paid (Note 8) - - - (1,262,559)
Net income - - - 1,221,844
------- ------------- ------------- --------------
BALANCE, December 31, 1995 100,000 2,750,000 4,694,837 1,510,470
Net income - - - 1,703,056
------- ------------- ------------- --------------
BALANCE, December 31, 1996 100,000 $ 2,750,000 $ 4,694,837 $ 3,213,526
======= ============= ============= ==============
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL
STATEMENTS.
7
<PAGE>
<TABLE>
<CAPTION>
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
STATEMENTS OF CASH FLOWS
(NOTE 7)
YEAR ENDED DECEMBER 31, 1996 1995
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,703,056 $ 1,221,844
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 433,093 434,344
Affiliate expense allocations credited to
accounts receivable from stockholder 874,270 813,086
Cash provided by (used for):
Trade accounts receivable 7,039 (4,847)
Retirement contribution refund receivable 2,115,677 -
Inventories 37,958 91,196
Prepaid expenses (16,074) 8,053
Accounts payable 78,312 219,524
Accrued liabilities (98,114) (46,002)
Accrued pension plan liability (9,105) 40,715
Net cash provided by operating activities 5,126,112 2,777,913
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (93,456) (441,772)
Loans to stockholder (4,515,335) (3,282,175)
------------- -----------
Net cash used in investing activities (4,608,791) (3,723,947)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (521,409) (553,910)
Proceeds from the issuance of long-term debt - 326,940
Deferred loan costs - (9,303)
------------- -----------
Net cash used for financing activities (521,409) (236,273)
------------- -----------
Net decrease in cash and cash equivalents (4,088) (1,182,307)
CASH AND CASH EQUIVALENTS, beginning of year 36,595 1,218,902
------------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 32,507 $ 36,595
------------- -----------
</TABLE>
8
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL
STATEMENTS.
<PAGE>
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
SUMMARY OF ACCOUNTING POLICIES
BUSINESS The Durango & Silverton Narrow Gauge Railroad Company (the
"Company") was incorporated under the Laws of the State of
Colorado on June 22, 1979. The Company operates a steam
engine railroad tourist attraction that carries passengers
between the towns of Durango and Silverton, Colorado,
principally between the months of May through October. The
Company's administrative headquarters are located in
Howey-in-the-Hills, Florida.
INVENTORIES Inventories are stated at the lower of cost (first-in,
first-out) or market. Cost is determined using the
first-in, first-out method.
PROPERTY, Property and equipment are stated at cost less accumulated
EQUIPMENT depreciation. Depreciation is computed over the estimated
AND useful lives of the assets using the straight-line method.
DEPRECIATION
AMORTIZATION Deferred loan costs are being amortized using the
straight-line method over the seven-year term of the loan.
TAXES ON The absence of a provision for income taxes is due to the
INCOME election by the company and consent by its stockholder to
include his respective share of taxable income of the
company in his individual tax return. As a result, no
federal tax return is imposed on the corporation.
FAIR VALUE OF Statement of Financial Accounting Standards No. 107,
FINANCIAL "Disclosures about Fair Value of Financial Instruments,"
INSTRUMENTS requires disclosure of fair value information about
financial instruments. Fair value estimates discussed
herein are based upon certain market assumptions and
pertinent information available to management as of
December 31, 1996.
The respective carrying values of certain on-balance-sheet
financial instruments approximated their fair values.
These financial instruments include cash and equivalents,
trade receivables, accounts payable and accrued expenses.
Fair values were assumed to approximate carrying values
for these financial instruments since they are short term
in nature and their carrying amounts approximate fair
values or they are receivable or payable on
9
<PAGE>
Demand. The fair value of the Company's long-term debt
also approximates carrying value and is estimated based
upon the quoted market prices for the same or similar
issues or on the current rates offered to the Company for
debt of the same remaining maturities.
USE OF The preparation of financial statements in conformity with
ESTIMATES generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
NEW On January 1, 1996, the Company adopted Summary of
ACCOUNTING Financial Accounting Standards No. 121, "Accounting for
STANDARD the Impairment of Long-Lived Assets and for Long-Lived
assets to be disposed of," ("SFAS No. 121"). SFAS No. 121
Requires, among other things, impairment loss of assets to
be held and gains or losses from assets that are expected
to be disposed of be included as a component of income
from continuing operations before taxes on income. During
1996, there have been no write-downs required in the
accompanying financial statements.
10
<PAGE>
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
1. RETIREMENT Since 1981 the Company had been a covered employer under
CONTRIBUTION the Railroad Retirement Tax Act ("RRTA"). From 1981
REFUND through December 31, 1993, the Company and its employees
RECEIBABLE made contributions to the fund through recurring payroll
deductions. During 1994, the Company received notice from
the board of governors of the RRTA that it no longer met
the requirements necessary to be included in the RRTA
effective January 1, 1990. Accordingly, the Company filed
for a refund of the employer and certain employee
contributions made to the RRTA for the years ended
December 31, 1990 through December 31, 1993. In 1996, the
Company received a refund of $2,115,677, which represented
the amounts contributed to RRTA net of any normal
contributions necessary for the Company and its employees
to be included in the federal social security system
during the refund period. Approximately $338,000 of the
refund amount received by the Company related to employee
contributions that will be reimbursed to those employees.
The employee portion of the refund is reflected as a
liability on the December 31, 1996 balance sheet. In
addition, approximately $273,000 of federal unemployment
taxes were withheld from the refund and were paid to the
Internal Revenue Service on behalf of the Company for the
years 1990 through 1993.
2. INVENTORIES Inventories consist of the following:
Concession and souvenir items $ 253,635
Parts 485,895
---------
$ 739,530
=========
ALL INVENTORY IS PLEDGED AS COLLATERAL (SEE NOTE 4).
11
<PAGE>
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
3. PROPERTY AND PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
EQUIPMENT
USEFUL LIVES
------------
Land $ 770,988
Land improvements 10 years 181,387
Buildings 30 years 3,457,347
Machinery and equipment 10-25 years 8,149,879
Vehicles 5 years 175,604
--------------
12,735,205
Less accumulated depreciation 6,216,004
--------------
$ 6,519,201
==============
All property and equipment is pledged as collateral (see
Note 4).
4. LONG-TERM Long-term debt consists of a note payable to a bank
DEBT bearing interest at the commercial paper rate plus 5%
(10.4% at December 31, 1996). As of December 31, 1996,
payments of $48,173 plus interest were due monthly through
August 2001, at which time the remaining unpaid principal
balance plus interest was due. As of December 31, 1996,
the Company was in violation of certain debt covenants.
Subsequent to December 31, 1996, the note payable was
fully paid upon the sale of the Company's stock (see Note
9). The note payable was collateralized by substantially
all the Company's assets and was personally guaranteed by
the Company stockholder prior to its repayment.
The aggregate maturities of long-term debt are as follows
as of December 31, 1996:
1997 578,076
1998 578,076
1999 578,076
2000 578,076
2001 2,058,067
==== =========
12
<PAGE>
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
5. EMPLOYEE DEFINED BENEFIT PENSION PLAN
BENEFIT
PLANS The Company has a noncontributory defined benefit pension
plan (the "plan") covering substantially all full-time
employees. The plan provides pension benefits that are
based on the employee's average annual compensation and
their number of years of service. The Company's funding
policy for the plan is to make at least the minimum annual
contributions required by applicable regulations.
A summary of the components of net periodic pension cost
for the plan and the total contributions charged to
pension expense for the plan follows:
1996 1995
-------- ---------
Defined benefit plan:
Service cost $ 2,199 $ 11,916
Interest cost 20,736 17,812
Actual return on plan assets 1,788 -
Net amortization and deferral 7,412 10,987
-------- ---------
Total pension expense $ 32,135 $ 40,715
======== =========
Assumptions used in the accounting for the plan in 1996 as of December 31, were:
1996 1995
-------- ---------
Weighted average discount rates 9.0% 9.0%
Rates of increase in compensation levels 4.5% 4.5%
Expected long-term rate of return on assets 9.0% 9.0%
13
<PAGE>
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
The following table sets forth the funded status and
amounts recognized in the balance sheet at December 31,
1996 for the plan:
Actual present value of benefit obligations:
Vested benefit obligation $ (143,285)
----------
Accumulated benefit obligation $ (159,328)
----------
Projected benefit obligation $ (257,745)
Plan assets at fair value 43,028
----------
Projected benefit obligation
in excess of plan assets (214,717)
Unrecognized net loss 16,448
Prior service cost not yet recognized in
net periodic pension cost 131,988
----------
Net pension liability recognized in the
statement of financial position $ (66,281)
401(K) PROFIT SHARING PLAN
The Company also established a 401(k) profit sharing plan
covering substantially all employees meeting certain
minimum age and service requirements. The Company's
contributions to the plan are determined by the Board of
Directors and are limited to a maximum of 50% of the
employee's contribution and 6% of the employee's
compensation. Contributions to the plan amounted to
$39,871 and $47,825 for the years ended December 31, 1996
and 1995, respectively.
14
<PAGE>
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
6. COMMITMENTS SALES AND TOURISM TAX ASSESSMENT
AND
CONTINGENCIES During 1994, the Company was audited by the Colorado
Department of Revenue. The audit resulted in an assessment
of $165,660 of additional sales and tourism taxes,
interest and other charges for the period June 1983
through December 1991. The entire balance of the
assessment was deposited with the Colorado Department of
Revenue and expensed in 1994. The Company is currently
appealing the assessment, and if successful, this deposit
will be refunded to the Company with interest at prime
plus 2%. If the appeal is not successful, it will be
retained by the department and applied against any
deficiency. Due to uncertainties that exist at this time,
management is unable to estimate the likelihood of an
unfavorable outcome nor the amount or range of a potential
loss, if any.
LITIGATION
During 1995, the Company signed a settlement agreement
related to a wrongful termination litigation case with two
former employees. The settlement amount of $154,114 was
paid in 1995 and has been reflected in the 1995 income
statement as an other expense.
FEDERAL UNEMPLOYMENT TAX REFUND
In connection with the retirement contribution refund
receivable (see Note 1), the Company was obligated for the
payment of federal and state unemployment taxes during the
year 1990 through 1993. The federal unemployment taxes
were withheld from the refund received, and the Company
paid approximately $169,000 of state unemployment taxes.
As a result of the payment of the state unemployment
taxes, the Company has requested a credit for the amount
paid to be applied against the federal unemployment taxes
previously withheld from the RRTA refund. The refund
applied for is approximately $237,000. Management is
unable to determine the likelihood that such amounts will
be received, and accordingly, no receivable has been
recorded in the accompanying financial statements.
15
<PAGE>
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
ENVIRONMENTAL MATTERS
A Phase 1 environmental site assessment was performed at
the Company's facilities in Colorado, which resulted in
the identification of various potential environmental
issues. The consulting firm that performed the site
assessment is not recommending that additional sampling
(e.g., Phase 2) be conducted at the facilities in order to
identify additional environmental issues. Certain issues
identified in the Phase 1 assessment indicated that
additional testing and evaluation may be required to
implement the recommended clean-up activities and to
identify additional environmental issues, if any. The cost
of the recommended clean-up activities has been estimated
by the management of the Company prior to the sale of
stock (see Note 9) to range from $50,000 to $200,000.
However, due to the various uncertainties that exist at
this time, management accrued $50,000 as of December 31,
1993.
7. SUPPLEMENTAL For purposes of the statement of cash flows, all highly
CASH liquid investments with a maturity date of three months or
INFORMATION less are considered to be cash equivalents. Cash and cash
equivalents include checking accounts and money market
funds.
YEAR ENDED DECEMBER 31, 1996 1995
----------------------- ---- ----
Cash paid for interest
during the year $ 543,463 $ 561,500
Noncash financing and
investing activities:
Distribution of
accounts receivable
from stockholder as a dividend
(see Note 8) - 1,262,559
= ========== =========
16
<PAGE>
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
8. RELATED PARTY AFFILIATE EXPENSE ALLOCATIONS
TRANSACTIONS
Included in the Company's operating expenses for 1996 and
1995 are $874,270 and $813,086, respectively, of expenses
allocated from affiliated companies. The expense
allocations include amounts related to administrative and
accounting functions performed for the Company by
employees of the affiliated companies of $274,270 and
$213,086 for 1996 and 1995, respectively, and a $600,000
fee for both of 1996 and 1995 for the use of an airplane
owned by another related party company. The expense
allocations are recorded as a reduction of the accounts
receivable from stockholder.
ACCOUNTS RECEIVABLE FROM STOCKHOLDER
The Company's stockholder receives advances from the
Company on a periodic basis. Interest is charged on the
advances at an annual rate of 6.5%, and there are no
specific repayment terms for outstanding advances or
related accrued interest. As of December 31, 1996,
advances and the related accrued interest totaled
$8,689,745. Interest income related to the advances for
the years ended December 31, 1996 and 1995 was $528,487
and $373,455, respectively. For the year ended December
31, 1995, dividends of $1,262,559 were paid and recorded
as a reduction of the accounts receivable from
stockholder. Prior to the sale of stock (see Note 9), the
accounts receivable from stockholder were satisfied in the
form of a dividend.
9. SUBSEQUENT SALE OF STOCK
EVENTS
On March 13, 1997, the stockholder of the Company sold all
of the Company's outstanding shares for a total purchase
price which consisted of: approximately $5 million in
cash; two promissory notes aggregating $10.05 million;
200,000 shares of the purchaser's common stock and a
six-year warrant to purchase 1,610,000 shares of the
purchaser's common stock at $3.50 per share.
17
<PAGE>
THE DURANGO & SIVERTON
NARROW GAUGE RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
SALE OF ASSETS
On March 12, 1997, the Company sold approximately two
acres of land to an affiliated entity. Located on the land
is a slag pile which is one of the items identified in the
environmental site assessment as a potential environmental
issue (Note 6).
The Company retained the right to have reasonable access
to such property and reasonable usage of the slag pile
contained thereon. Further, the Company received a
ten-year option to repurchase the property for a nominal
sum.
18
<PAGE>
(b) PRO FORMA FINANCIAL INFORMATION
INTRODUCTORY NOTE - The following tables set forth certain unaudited condensed
pro forma combined financial information for the Company after giving effect to
the Durango Acquisition using the purchase method of accounting as if such
transaction had been consummated, with respect to the statement of operations,
on January 1, 1996, and with respect to the balance sheet, as of December 31,
1996. The information contained in the following tables does not purport to be
indicative of the results of operations and financial position of the Company
which may have been obtained had the acquisition of D&SNG been consummated on
the dates assumed.
The unaudited condensed pro forma combined financial information
reflects a preliminary allocation of the purchase price of D&SNG and,
accordingly, is subject to change upon, among other things, a final
determination of required purchase accounting adjustments including the
allocation of the purchase price to the assets acquired and liabilities assumed
based on their respective fair values which has not yet been made. Accordingly,
the purchase accounting adjustments made in connection with the development of
the unaudited condensed pro forma combined financial information appearing in
this Offering document are preliminary and have been made solely for purposes of
developing such pro forma combined financial information.
The pro forma information with respect to the Durango Acquisition of
D&SNG assumes the issuance of 200,000 shares of the Company's Common Stock to
the seller of D&SNG as partial consideration for the purchase thereof. The
balance of the consideration paid to the seller included: (i) approximately $5
million in cash; (ii) $10.05 million in seller financing consisting of two
promissory notes: a one-year note (subject to extension) for $4.2 million which
bears annual interest (payable monthly) at the 30-day commercial paper rate as
published by THE WALL STREET JOURNAL plus 650 basis points per annum; and a
five-year note for $5.85 million which bears interest at an annual rate of 9.25%
which increases in steps to 10% by year four; and (iii) a common stock purchase
warrant covering 1,610,000 shares exercisable at $3.50 per share. The Company
has agreed to register for resale the 200,000 shares (valued at $2.00 per share)
and the 1,610,000 shares (valued at $.09 per share) underlying the
aforementioned six-year warrant. The term of the $4.2 million note may be
extended by the Company, at its option, for an additional six months upon the
occurrence of certain circumstances; at maturity this note is convertible by the
holder thereof into common stock of the Company at a conversion rate equal to
the then closing sale price of the Company's common stock (not to exceed $5.00
per share); at the maturity date should the noteholder elect to receive each in
full payment of the $4.2 million note (in lieu of conversion into common stock),
then the Company may extend the maturity date for an additional eighteen months.
The obligations represented by the Notes are secured by a second position on
substantially all of the assets of D&SNG. The purchase price for the Durango
Acquisition was determined in arms' length negotiations between the Company and
the seller.
19
<PAGE>
THIS INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE HISTORICAL
FINANCIAL STATEMENTS AND ACCOMPANYING NOTES OF THE COMPANY CONTAINED IN ITS FORM
10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996, AND THE HISTORICAL FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES OF D&SNG FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995, INCLUDED HEREWITH.
<TABLE>
<CAPTION>
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
-----------------------------------------------
DECEMBER 31, 1996
FAR D&SNG PROFORMA COMBINED
ADJUSTMENTS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash and Cash Items $ 7,604,854 $ 32,507 $ 515,629 (1)(2) $ 8,152,990
Accounts Receivable 5,332 5,332
Inventories 739,530 739,530
Prepaids and Other
Current Assets 255,372 79,702 (150,000)(2) 185,074
------------ ------------ ------------ ------------
Total Current Assets 7,860,226 857,071 365,629 9,082,926
Fixed Assets, Net 2,413,320 6,519,201 22,885,242 (2) 31,817,763
Deposit for D&SNG
Acquisition 2,000,000 (2,000,000)(2)
Deferred Loan Costs
& Other, Net 867,107 252,734 (82,734)(1)(2) 1,037,107
Notes and Interest
Receivable-Related
Party 8,689,745 (8,689,745)(1)
------------ ------------ ------------ ------------
$ 13,140,653 $ 16,318,751 $ 12,478,392 $ 41,937,796
============ ============ ============ ============
Accounts Payable and
Accrued Liabilities $ 626,283 $ 1,223,736 $ $ 1,850,019
Current Maturities of
Long-Term Debt 578,076 321,924 (2) 900,000
------------ ------------ ------------ ------------
Total Current Liabilities 626,283 1,801,812 321,924 2,750,019
Long-Term Debt 8,250,682 3,792,295 13,857,705 25,900,682
Other Long-Term Liabilities 66,281 8,412,226 (2) 8,478,507
------------ ------------ ------------ ------------
Total Liabilities 8,876,965 5,660,388 22,591,855 37,129,208
Stockholders' Equity 4,263,688 10,658,363 (10,113,463)(1)(2) 4,808,588
------------ ------------ ------------ ------------
$ 13,140,653 $ 16,318,751 $ 12,478,392 $ 41,937,796
============ ============ ============ ============
</TABLE>
See Notes To Unaudited Condensed Pro Forma Combined Financial Information
20
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
PROFORMA COMBINED
FAR D&SNG ADJUSTMENTS
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue $ $ 8,946,462 $ $ 8,946,462
Cost of Revenue 5,143,802 18,720(4) 5,162,522
----------- ----------- ----------- -----------
3,802,660 (18,720) 3,783,940
Selling, General and
Administrative 2,208,129 1,992,224 (906,000)(5) 3,294,353
----------- ----------- ----------- -----------
Operating Income (Loss) (2,208,129) 1,810,436 887,280 489,587
Interest Expense, Net 166,911 52,238 1,722,735 (3) 1,941,884
Amortization of
Financing Items 220,722 55,142 (16,547)(3) 259,317
----------- ----------- ----------- -----------
Income (Loss) Before
Taxes (2,595,762) 1,703,056 (818,908) (1,711,614)
Income Taxes ----------- ----------- ----------- -----------
Net Income (Loss) $(2,595,762) $ 1,703,056 $ (818,908) $(1,711,614)
=========== =========== =========== ===========
Weighted Shares
Outstanding 7,623,050 200,000 7,823,050
Earnings (Loss) Per
Share $ (0.34) $ (0.22)
=========== ===========
</TABLE>
See Notes To Unaudited Condensed Pro Forma Combined Financial Information.
21
<PAGE>
NOTES TO UNAUDITED CONDENSED PRO FORMA
COMBINED FINANCIAL INFORMATION
The following pro forma adjustments have been made:
(1) Adjustments prior to the Durango Acquisition which primarily
reflect repayment of related party receivables due from the D&SNG
stockholder in the amount of approximately $8.7 million through the
payment of a dividend to the D&SNG stockholder.
(2) An adjustment to record the preliminary allocation of the
costs of the Durango Acquisition (approximately $15.8 million)
and the estimated acquisition costs (approximately $400,000).
This adjustment also eliminates the historical D&SNG
stockholder's equity and records additional purchase
accounting adjustments to increase fixed assets, primarily
land (approximately $22.9 million), establish deferred tax
liabilities (approximately $8.4 million) and to write-off
deferred loan costs related to debt repaid as part of the
acquisition ($252,734).
(3) To record additional interest expense (approximately $1.2
million) and reduce amortization of loan costs (approximately
$17,000) arising from incremental debt as a result of
financing the acquisition, net of interest income available
from excess cash (approximately $13,000). To eliminate
interest income on loans to affiliates (approximately
$528,000).
(4) To record additional depreciation expense resulting from the
write-up of depreciable fixed assets (approximately $280,000) to fair
value. This expense adjustment was approximately $19,000 for the year
ended December 31, 1996.
(5) To record savings from the reduction or elimination of certain
expenses by the Company following the Durango Acquisition.
This adjustment consisted primarily of approximately $600,000
for a corporate airplane which the Company will no longer use,
approximately $274,000 of corporate management fees which will
no longer be charged to the Company, and approximately $32,000
of lease payments (net of termination costs) for an apartment
which the Company has discontinued leasing.
22
<PAGE>
(C) EXHIBITS
10.1 Share Purchase Agreement between The Durango & Silverton
Narrow Gauge Railroad Company and the Registrant, dated
December 10, 1996, and Addendum to Share Purchase
Agreement, dated February 28, 1997, is hereby
incorporated by reference to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December
31, 1996, as filed with the Securities and Exchange
Commission (via EDGAR) on March 28, 1997.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST AMERICAN RAILWAYS, INC.
DATE: MAY 13, 1997 BY: /s/ DONALD P. CUMMING
--------------------------
DONALD P. CUMMING, VICE PRESIDENT
AND ACTING CHIEF FINANCIAL OFFICER
24
